Article of the Week: Dr. Raghuram Rajan’s speech on Democracy, Inclusion, and Prosperity

The question that Dr. Raghuram Rajan, governer of RBI in his professor of political economy avatar, asks is

But how do countries ensure political freedom and economic prosperity? Why do the two seem to go together? And what more, if anything, does India have to do to ensure it has these necessary underpinnings for prosperity and continued political freedom?

Dr. Rajan starts by explaining Fukuyama’s three pillars of a liberal democratic state

Strong Government: Strong government does not only mean one which has great military power or effective intelligence against enemies, but one that can provide effective and fair administration too. Dictatorships are usually weak governments. They can terrorize their citizens, but not provide good governance.

Rule of Law: Government’s actions are constrained by rule of law, which might be enforced by religious, judicial or moral authority.

Democratic Accountability: Government has to be popularly accepted.

Strong governments do not always move in the right direction.

Hitler provided Germany with extremely effective administration – the trains ran on time, as did the trains during our own Emergency in 1975-77. His was a strong government, but Hitler took Germany efficiently and determinedly on a path to ruin, overriding the rule of law and dispensing with elections.

Both rule of law and democratic accountability are needed to steer a strong government on the right path. (Why both? Read the explanation in the full text of the speech.)

Dr. Rajan then goes on to introduce a fourth pillar in his discussion – free enterprise.

Why are political freedoms in a country, of which representative democracy is a central component, and free enterprise mutually supportive?

It isn’t quite obvious that they should be. Democracy treats everyone equally. Free market system does not. Income and property decide an individual’s power in a free market system. But despite this difference there are certain circumstances in which they go hand and in hand.

(To) the extent that the rich are self-made, and have come out winners in a competitive, fair, and transparent market, society may be better off allowing them to own and manage their wealth, settling in return for a reasonable share of their produce as taxes. The more, however, that the rich are seen as idle or crooked – as having simply inherited or, worse, gained their wealth nefariously – the more the median voter should be willing to vote for tough regulations and punitive taxes on them.

The key, then, is level playing field. When there is a perception of fairness in competition, inequality does not breed resentment. Democracy and free market support each other by giving everyone the opportunity.

The level playing field, however, is easier hoped than achieved.

(In Western democracies) quality higher educational institutions are dominated by the children of the rich, not because they have unfairly bought their way in, but because they simply have been taught and supported better by expensive schools and private tutors. Because middle class parents do not have the ability to give their children similar capabilities, they do not see the system as fair.

This is something India needs to be careful about. Right now we are moving in the direction of providing level-playing field to more and more people by giving access to education. But it would not automatically remain so.

In the concluding part, Dr. Rajan makes an interesting point about India’s political situation. He is of the view that (despite many shortcomings), the checks and balances on the government is not in a bad shape. The rule of law and democratic accountability is functional here. But strong government is still wanted. This is a situation unique to India because in most parts of the world, strong governments have emerged first and checks and balances have followed.

Let me emphasize, we need “checks and balance”, but we should ensure a balance of checks. We cannot have escaped from the License Permit Raj only to end up in the Appellate Raj!